Published in the Nikkei Asian Review 16/5/2014
US pharma giant Pfizer’s bid to take over Astra Zeneca has kicked off a furore in the UK. Pfizer’s chief executive was hauled before a parliamentary committee and interrogated about his research and development plans. Influential newspapers have been fiercely critical, claiming the deal would destroy the country’s science base. Inside and outside parliament the rhetoric has been vicious.
The debate is about much more than the future of the UK pharma industry. What is at stake are such fundamental issues as who should control large listed companies and what should be the role of finance in the broader economy.
In the US and the UK systems, shareholders have long ruled supreme. As the collective owners of companies they have the right to buy and sell corporate control. Maximizing shareholder value has become the overriding goal of managements. Until now politicians have usually kept their noses out of it.
In France protectionism and distrust of financial markets are traditional – indeed, President Francois Hollande is currently blocking General Electric’s bid for Alstom. Resource nationalism is on the rise in successful economies like Australia too. But for the progenitor of Anglo-Saxon capitalism to question one of its key tenets is another matter entirely.
Meanwhile on the other side of the world the movement is in the opposite direction. East Asian financial markets are growing in scale and sophistication and governments are working to build, or in Japan’s case to rebuild, a thriving equity culture. If the UK loses faith in the value of finance, Hong Kong and Singapore will seize the opportunity and even Japan may dust off its abortive plans to turn Tokyo into an international financial centre.
Remember, it was a protectionist own goal by the Americans that sparked London’s ascent to global financial pre-eminence. In 1963 new taxes destroyed Wall Street’s yankee bond business, enabling the Eurodollar bond market to grow into a huge and highly profitable franchise for the then depressed City of London. History could repeat itself as the EU prepares a boatload of new regulations, restrictions and punitive levies such as the financial transactions tax.
The difference in east Asian and western attitudes to finance has its roots in the dynamics of their respective financial crises and, more important, in the contrasting policy response. Financial crises have erupted throughout history, in a wide range of different systems. They will continue to erupt as long as human beings remain social animals susceptible to the emotions of fear and greed.
When boom turns to bust, the system which spawned the crisis loses credibility. In the west the trauma of the Lehman shock of 2008 and its aftermath runs deep. Politicians and opinion-leaders are running scared of the popular mood, which remains sour and sensitive to such issues as economic inequality, immigration and job security which got little traction when the good times were rolling. “Rock-star economist” Thomas Piketty’s Capital in the Twenty First Century – essentially a rejection of the very concept of the equity risk premium – has scored a huge success almost everywhere.
Resentment towards the financial industry has been compounded by the widespread and justified belief that people guilty of gross incompetence or worse – including politicians and regulators – were never held properly accountable. Furthermore the globe-spanning “too big too fail” mega-players remain comfortably in place, whereas start-ups and boutique deal-makers drown in torrents of costly new regulation.
The bursting of Japan’s 1980s bubble economy happened in very different circumstances. The system responsible was hardly capitalist at all, being micro-managed by financial bureaucrats, supposedly for the national good. There were no stock options or lavish bonuses for bankers or corporate managers. Domestic takeovers were as rare as skinny sumo wrestlers.
In reaction to its crisis Japan has been slowly but steadily moving towards a more market friendly financial culture. Last year’s takeover of Tokyo Electron, one of the jewels in Japan’s high-tech crown, by Applied Materials of the US generated little adverse comment, let alone parliamentary hearings. Recent announcements of share buyback programmes by such corporate blue-bloods as NTT, Mitsubishi Corporation and Mitsui & Co indicate greater attention to shareholder value.
The Asian crisis of 1997-8 was a more complex affair than the “crony capitalism” label suggests, but there can be little doubt that it triggered enormous economic and political change in countries as wide-ranging as South Korea and Thailand. The threat of bankruptcy purged excesses and swept away politically-driven vanity projects. Nothing was too big to fail, not even the ruling family of Indonesia. Since then the general tendency has been towards more openness and transparency and the empowerment of rising middle classes.
Capitalism will thrive in the twenty first century, as it did in the preceding two centuries despite many setbacks. For all its flaws no better system exists for pricing capital and promoting economic vitality. Western countries should concentrate on making markets more competitive and efficient rather than offering bounteous rewards for failure, both individual and institutional. In this evolving new world, GE and Pfizer might be better off doing their shopping in Japan, South East Asia and India.